WOULD YOU borrow or lend money with strangers over the internet? It sounds risky, but more than 150,000 people are members of Zopa, a website that's a bit like an eBay for money.

The site was launched two years ago, and is growing fast. It has it sights firmly fixed on America and also plans to expand in Europe and Asia. So it must be doing something right.

James Alexander, co-founder and UK CEO of Zopa, said: "We know our members come to Zopa not just for the great rates, but also because they enjoy helping others. A Zopa member is part of a community of people looking for a more human way to do money'."

And you get to cut out the banks, with their often faceless service centres and fat profits.

So how does it work? Zopa - which is short for zone of possible agreement - is basically an online exchange where people can borrow and lend money.

You can lend as little as £10, or as much as you like, over one to five years. You can even select the type of borrower. Zopa runs identity and credit checks on all its potential borrowers and they are then grouped into four categories: A*, A, B and C.

A* borrowers are the least likely to default on the loan; borrowers in the C class are a bit more risky.

Let's say you offer £100 to A-rated borrowers over one year at 7.5%. The borrowers size up the rate and snap it up if it's a good deal. Or they come back another day if the rates aren't tempting. The lender's money meanwhile earns interest of 4.5%.

Borrowers can apply for loans of between £1000 and £15,000 and can pay off the debt early with no penalty. If a borrower takes out a loan, he or she enters into a legally binding contract and agrees to pay monthly by direct debit.

James Watson is a 31-year-old software analyst from Fife. He signed up to Zopa a few months ago. "I like the concept," he says. "It's a bit like lending money to a friend or relative, because you can find out about the borrowers and chat to them over the website. It's all so much more human and personal."

Zopa borrowers often explain why they want the money and frequently send messages of thanks to lenders. The website's forum is certainly lively.

So far so good, but what if the borrower misses a payment? Zopa argues that its rigorous checking procedures keep defaults to a minimum. The actual bad debt rate is currently less than 0.2% of the total number of borrowers. Zopa also rejects more than half the potential borrowers. The risk of default is cut even further because Zopa chops up the lending into chunks. If you lend £500 or more, it is spread across at least 50 borrowers.

Watson is currently lending to 78 borrowers and is steadily increasing his balance on the site. He says: "I get a good return and I can help people out. It's also great to cut out the banks, especially as so many impose such excessive charges."

But should the worst come to the worst, Zopa will call in a debt collection agency, in much the same way as any other lender.

Of course, it's not free. Lenders pay Zopa a 0.5% annual service fee. Borrowers have to pay a 0.5% fee for each transaction. If they took out a loan for £2000, they would therefore pay a £10 fee. The fee would be added to the loan, so they would pay interest on £2010.

Zopa also makes a bit of extra money by selling payment protection insurance to willing borrowers.

Lenders get a pretty good deal. The average annual return so far is 6.75% after the fee and bad debts, though it does not include tax. Lenders are liable for standard income tax on any earnings. But the return can be as high as 14% if you are prepared to lend to riskier borrowers.

The potential returns compare well with a savings account. You would be lucky to get 5.5% in an easy-access account, although some of the top fixed deals pay 6.3%.

But remember, Zopa is not as safe as a deposit account because of the risk of default.

Borrowers can also get a low-cost loan, but it depends on their credit rating and the number of lenders who are chasing their business. The typical rate for an A* borrower at the moment is 7% for a £5000 loan over three years. However, you could expect to pay 11% if you fell into the C category.

Mainstream lenders also increase rates for riskier borrowers, but some firms are advertising cheaper rates as low as 6% if you want to borrow £5000 over three years. So it makes sense for borrowers to shop around.

Zopa has a Consumer Credit Licence and is an authorised intermediary. The site is not a bank, so cannot sign up to the Financial Services Compensation Scheme, which means you do not have the same safeguards as with a deposit account. But if the business went bust, all would not necessarily be lost, because the contract exists between the borrower and lender.

Lisa Taylor of Moneyfacts, a financial data company, says: "It's a really simple proposition that takes banking right back to the basics. It might take some time to build up trust in the brand and the concept, but it certainly seems to be going from strength to strength."